Written by Salvatore Minetti, CEO and Founder of Prospex.ai
There’s no denying the transformative impact online crowdfunding platforms have had in supporting the next generation of scaling UK businesses.
Since the onset of the global financial crisis, a time when businesses and consumers were suddenly confronted by stringent lending measures from high street lenders and mainstream institutions, alternative finance has played a critical role in ensuring concept proven start-ups have access to growth capital.
By connecting investors with a burgeoning network of startups demonstrating immense growth potential, crowdfunding platforms ensure entrepreneurs are able to finance their long-term expansion. As a result, the number of startups in the UK is rising – in fact, between 2012 and 2017 approximately 3.5 million new companies were founded across Britain.
When it comes to launching a successful crowdfunding round, businesses can often feel overwhelmed by the volume of funding options available to them. And without a credible funding strategy in place, business leaders risk pursuing the wrong type of finance that is not compatible with their long-term growth model.
As the CEO and Co-Founder of Prospex – a company who has just launched a crowdfunding round on Syndicate Room– there are a number of important lessons startups need to keep in mind when seeking alternative finance.
What type of funding round are you planning to launch?
For start-ups that have only ever been self-funded, alternative finance can be daunting. The range of options can seem overwhelming at times, and part of the challenge can be deciding which type of investment to pursue. A survey from last year found that only 57% of SMEs feel they have a good understanding of the finance options available to them, while 47% fear that external finance could result in them losing control in the way their business is managed. Much of this boils down to a lack of awareness and understanding about the available funding models.
Entire books can be dedicated to the ins and outs of each respective funding model. But, more generally, to make the right decision, start-ups must address the following questions from the outset – what type of funding round will the business be launching (seed, or Series A, B, or C)? What is the fundraising target? How will the capital raised be used to support the growth of the company? Is it purely funding the business requires, or does it want mentorship or even some positive exposure? Answering these questions will inform a funding strategy best suited to the needs of the business.
Is your company more suited to equity or debt finance?
Prior to launching a crowdfunding round, a vital decision will need to be made – is your company more suited towards debt or equity finance? The answer to this question will depend on how the business plans to use the capital raised. Debt finance reflects the traditional loan model i.e. investor capital is loaned to company on the proviso that the loan will be paid back with interest. Within the alternative finance space, the most common form of debt finance is peer-to-peer lending, or debt crowdfunding.
On the other hand, equity finance refers to the process whereby people – ranging from retail investors to experienced business leaders and high-profile figures – invest in an early-stage company in exchange for shares. Unlike debt finance, investors are repaid by receiving part ownership of the company.
There are a number of factors to consider when determining whether a business is more suited to debt or equity finance. Both offer advantages and limitations, though in the UK there is a general preference for unlisted startups to pursue equity over debt. For SMEs that want to retain complete control and not dilute ownership to a community of investors, debt finance would be the most appropriate source of alternative capital.
However, for early-stage companies launching a seed of Series A funding round, equity finance can link these start-ups with well-connected investors who can offer their expertise, wisdom and industry connections to support long-term growth. Of course, it is important to be clear how much ownership the company is willing to offer to investors, striking the right balance.
Set clear, realistic funding targets
There seems to be an almost endless supply of news-stories about multi-million-pound funding rounds for UK startups. This can be a source of inspiration for startups about to launch their first funding round, but they cannot let these stories influence their plans for funding.
When looking to external finance, a startup needs to have a funding target in mind and a clear strategy as to how this money will be used to support the growth of the business. Simply focusing on raising as much capital as possible can create significant problems in the long-term. Funding needs to help a startup achieve a goal, not act as the objective in itself.
There has never been a better time for startups looking to raise finance. Investors are clearly keen to support the next generation of entrepreneurs, and government-backed initiatives such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) ensure a steady flow of capital is readily available.
Nonetheless, CEOs and founders need to be see funding as one element that will help fuel their companies’ long-term growth. With this clearly in mind, these startups will be able to distinguish the type of finance they require and the appropriate amount to raise.
Salvatore Minetti is the CEO/Founder of Lomi Artificial Intelligence. Prospex.ai, Sales Leads Intelligently, is their first product. He is also a Portfolio Non-Executive Director for numerous technology companies.